Main Terms - Int Finance Flashcards
Exchange Rate
The price of one currency in terms of another currency.
Interest Rate Parity
A theory stating that the difference in interest rates between two countries is equal to the expected change in exchange rates between the countries’ currencies.
Futures Contract
A legal agreement to buy or sell a particular commodity or financial instrument at a predetermined price at a specified time in the future.
Currency Swap
A financial agreement between two parties to exchange principal and interest in different currencies.
Operational Hedging
Using operational strategies such as diversification of production locations to manage exchange rate risks.
Capital Adequacy Ratio
A measure used by banks to determine if they have enough capital to withstand a period of economic downturn.
Purchasing Power Parity
A theory suggesting that the exchange rates between currencies are in equilibrium when their purchasing power is the same in each of the two countries.
Economic Exposure
The type of currency risk that impacts the value of a company’s financial statements due to currency conversion.
Direct Quote
An exchange rate quoted as the domestic currency per unit of the foreign currency.
Indirect Quote
An exchange rate quoted as the foreign currency per unit of the domestic currency.
Spot Market
A market in which commodities or financial instruments are traded for immediate delivery.
Forward Market
A market in which commodities
Hedge
A strategy used to offset potential losses or gains that may be incurred by a companion investment.
Speculation
The act of trading in financial instruments or commodities for the purpose of profiting from fluctuations in price.
Arbitrage
The practice of taking advantage of a price difference between two or more markets.
Financial Derivative
A financial instrument whose value is derived from the value of an underlying asset or group of assets.
Default Risk
The risk that a party will not fulfill their financial obligations under the terms of a contract.
Systematic Risk
The risk inherent to the entire market or an entire market segment.
Unsystematic Risk
The risk that affects a very small number of assets.
Liquidity
The degree to which an asset or security can be quickly bought or sold in the market without affecting the asset’s price.
Efficient Market Hypothesis
A theory that states it is impossible to “beat the market” because stock market efficiency causes existing share prices to always incorporate and reflect all relevant information.
Foreign Direct Investment
Investment from one country into another typically involving active management and control of the foreign company.
Portfolio Investment
Investment in foreign stocks
Balance of Payments
A record of all transactions made by a country over a certain period of time
Current Account
A part of the balance of payments which records transactions relating to imports and exports of goods and services.
Capital Account
A part of the balance of payments which records transactions relating to investments and loans.
Financial Account
A part of the balance of payments which records transactions that involve financial assets and liabilities.
Real Exchange Rate
The exchange rate adjusted for inflation.
Nominal Exchange Rate
The exchange rate without any adjustments for inflation.
Fisher Effect
A principle stating that the real interest rate is independent of monetary measures
International Fisher Effect
The theory that the real interest rates are equal across countries.
Inflation Differentials
The hypothesis that different inflation rates in two countries will result in a change in the exchange rate between their currencies.
Currency Depreciation
A reduction in the value of a currency relative to other currencies.
Currency Appreciation
An increase in the value of a currency relative to other currencies.
Credit Risk
The risk of loss arising from a borrower who does not make payments as promised.
Market Risk
The risk of loss arising from movements in market prices.
Interest Rate Risk
The risk of loss arising from changes in interest rates.
Operational Risk
The risk of loss arising from inadequate or failed internal processes
Volatility
The measure of the change in the price of a financial instrument in a given period.
Leverage
The use of borrowed funds to increase the potential return on investment by using various financial instruments or borrowed capital.
Derivatives Market
A market where derivatives are traded
Credit Default Swap
A financial derivative that acts as an insurance policy against the non-payment of a loan.
Interest Rate Swap
A derivative that involves the exchange of interest payments between two parties.
Total Return Swap
A swap agreement in which one party makes payments based on a set rate
Equity Swap
A swap where the cash flows of one party’s financial instrument are exchanged for those of another party’s financial instrument.
Options Market
A market where options (rights to buy or sell assets at specific prices) are traded.
Call Option
An options contract that gives the holder the right to purchase a security at a specified price before a certain date.
Put Option
An options contract that gives the holder the right to sell a security at a specified price before a certain date.
Black-Scholes Model
A mathematical model used to determine the theoretical value of an option based on various influences including the volatility of the underlying asset
Monte Carlo Simulations
A computational algorithm that uses random sampling to calculate the values of derivatives and assess risk.
International Monetary Fund (IMF)
An international organization that aims to promote global monetary cooperation
Bretton Woods Agreement
An agreement established in 1944 that created a system of fixed exchange rates and led to the creation of the International Monetary Fund (IMF) and the World Bank.
Extraterritoriality
The application of a country’s laws beyond its borders
Foreign Corrupt Practices Act (FCPA)
A U.S. law that prohibits companies and their employees from bribing foreign officials to gain business advantages.
Trade Credit
The practice of allowing customers to purchase goods or services on credit
Forfaiting
A form of trade finance where exporters sell their receivables to a forfaiter at a discount in exchange for immediate cash.
JIT (Just-in-Time) Inventory System
A strategy that aims to improve a business’s return on investment by reducing in-process inventory and associated carrying costs.
Economic Order Quantity (EOQ)
A formula used to determine the optimal order quantity that minimizes total inventory costs.
Money Market
A segment of the financial market where financial instruments with high liquidity and short maturities are traded.
Capital Market
A market for buying and selling equity and debt instruments
Netting Systems
A method used by multinational companies to reduce the costs and risks associated with multiple cross-border transactions.
Central Depositories
Institutions that hold securities and facilitate the transfer of ownership without physical exchange.
Letter of Credit
A financial instrument issued by a bank guaranteeing a buyer’s payment to a seller upon fulfillment of specified conditions.
Spot Exchange Rate
The current exchange rate at which a currency can be bought or sold for immediate delivery.
Forward Exchange Rate
The exchange rate at which a currency can be bought or sold for delivery at a future date.
Interest Arbitrage
The practice of capitalizing on the difference in interest rates between two countries by borrowing in one currency and investing in another.
Trade Credit Terms
Terms such as 2/10 net 30, which offer a discount for early payment or set a deadline for the full payment.
Inventory Management
The process of ordering
Political Risk
The risk that an investment’s returns could suffer due to political changes or instability in a country.
Operational Finance
Financial activities that focus on managing the day-to-day operations of a business
Financial Forecasting
The process of estimating or predicting a business’s future financial performance.
Debt Financing
The practice of raising capital through borrowing
Equity Financing
The process of raising capital by selling shares of the company to investors.
Forward Rate Agreement (FRA)
A financial contract that determines the interest rate to be paid or received on an obligation beginning at a future start date.
Net Present Value (NPV)
A method used in capital budgeting to assess the profitability of an investment or project.
Internal Rate of Return (IRR)
The discount rate at which the net present value of an investment is zero
Payback Period
The time required for an investment to generate enough cash flow to recover its initial cost.
Economic Value Added (EVA)
A measure of a company’s financial performance based on residual wealth
Debt-to-Equity Ratio
A financial ratio that measures a company’s leverage by comparing its total liabilities to its shareholders’ equity.
Financial Leverage
The use of borrowed capital to increase the potential return on investment.
Cash Flow Management
The process of monitoring
Transaction Exposure
The risk of currency exchange rate changes affecting the value of financial transactions denominated in foreign currencies.
Translation Exposure
The risk that a company’s financial statements will be affected by changes in exchange rates when consolidating financial results from foreign operations.
Economic Exposure
The risk that a firm’s market value will be impacted by unexpected changes in exchange rates.
Investment Appraisal
The evaluation of the potential profitability or return on investment for a project or investment opportunity.
Credit Management
The process of managing a company’s credit policies
Cost of Capital
The rate of return required by investors to compensate them for the risk of investing in the business.
Capital Structure
The mix of debt
Discounted Cash Flow (DCF)
A valuation method used to estimate the value of an investment based on its expected future cash flows.
Hedging Techniques
Methods used by businesses to reduce financial risks
Exchange Rate Risk
The potential for financial losses due to changes in the exchange rate of one currency against another.
